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Hometown Banks:
Not What They Used to Be
BY DIANE SAUNDERSFORM, July 1989
"Gone to tuck a buck away" declared the old advertisement for a venerable New England bank. While banks are still places to tuck your personal savings, they definitely are not the institutions of yesterday. With mergers, leveraged buyouts, bankruptcies and myriad new-fangled equipment, Grandpa's First National, if indeed it still stands, ain't what it used to be.
"So many things are going on in the banking community," says Michele Leahy, sales rep at Leahy Business Products in Jersey City, N.J. New regulations have forced banks to streamline operations and paperwork systems. While banks are price conscious, Leahy, whose company does 95 percent of its business with banks, says they are also image conscious. "They are looking for solutions to their problems and they are looking to us to help them. Banks need new brochures, new forms and other paper supplies," she says.
New equipment has, in fact, increased the paper output of the banking business. Leahy cites ATM machines as an example. "They have created a lot of clean paperwork with very few problems," she says.
William Falstad, president of Kansas Bank Note Co. in Fredonia, Kan., and NBFA's associate second vice president says, "Banks are one of the greatest remaining paper factories. They have not cut down. Most people feel there needs to be a paper input document, so the growth curve in bank paperwork is still going up, more slowly perhaps, but it is not going down."
Although only 40 percent of his current business is with banks, John Martin, co-owner of Optimum Systems in Worthington, Ohio, hopes to take advantage of the banking industry's paper avalanche and increase this share to 75 percent. He recently hired a 16-year veteran of the Federal Reserve. Most of his company's marketing efforts are directed at banks. Computer hardware, fax machines and printers are among the non-form items Martin offers banks.
Like Martin, Mark Staley Jr., president of Conmar Form Systems, Inc., in Atlanta, is developing bank marketing strategies based on his background in credit union sales. He says changes in the industry have had an effect on his service to those institutions. "We spend more time reading and staying abreast of banking industry regulations than making sales calls," says Staley. "Regulation Z, the regulation governing truth in lending, for example, is constantly being amended. Changes occur so often that we never have an exact repeat order. We must always revise the document."
The MICR Line
Developed in 1956, Magnetic Ink Character Recognition (MICR) automated bank check-processing procedures. MICR characters are produced with a special font and printed with magnetic ink. During processing a machine "reads" the magnetic characters and sorts the documents.Production of MICR-encoded documents is a specialized operation involving rigid controls to produce a product that meets exact specifications. Quality control is a must to avoid costly rejections.
Specifications on MICR printing were issued in 1959 and are now published by the American National Standards Institute (ANSI) in ANSI X 3.2 - 1970 (Rev., 1976), Print Specifications for Magnetic Ink Character Recognition. Specifications for bank checks and other MICR-encoded documents are covered in ANSI X 9.13 - 1983 Specifications for the Placement and Location of MICR Printing and ANSI X 9.7 - 1981, American National Standard for Bank Check Background and Convenience Amount Field.
According to the latest figures, in 1984 the Federal Reserve system processed 40 billion encoded documents, of which 1.5 percent—600 million—were rejected by reader/sorters. Today, though the equipment is less tolerant of variances, production of MICR documents has improved and rejects are fewer. "And manufacturers are taking more precautions," says Martin.
Leahey says she has experienced few MICR reject problems. "I always have a spec sheet from the client when a new MICR number is being stripped in," Leahy says. "It is important to educate the client about these specs. The bank issues different MICR-encoding standards, and by using them you safeguard yourself. You don't want to produce a million bank deposit slips incorrectly."
Gary Redmond, CFC, vice president of McClelland Press, Inc., in Alexandria, Va., also has few MICR rejections. Instead of selling directly to banks, he markets one-writes and short-run continuous forms to bank stationers.
Banks demand quality products. Many have installed their own testing systems. Falstad says this sometimes places a strain on relationships with banks. "Banks argue about whether or not the documents produced are capable of going through their system," he says. "And some banks are not satisfied with anything."
MICR rejections are costly, so if the banks can get a 5 percent rejection rate down to 3 percent, it saves a lot of money, says Falstad.
Banks have been known to go to great lengths to achieve lower rejection rates. Falstad's firm produced a check order to be processed on very high speed equipment. Instead of the usual one MICR number, the bank requested three identical MICR numbers on each check. "The reader will be so fast," says Falstad, "that they will give it three whacks to be sure it is read. One of the three is sure to make it through."
How Reader/Sorters Read MICR Characters
When characters on a document are magnetized, each of the vertical leading (right-hand) edges has a positive polarity and each of the trailing (left-hand) edges has a negative polarity. (Like the north and south poles on a magnet.) When these polarities pass by the read head of the sorter or test device, the positive (right-hand) edges generate a current which produces a visible peak in the waveform.
Similarly, the negative (left-hand) edges produce visible valleys in the waveform. The distance between each of the character's edges is also important. It translates into different spacing between one peak/valley and its neighboring peak or valley. Each character has its own unique combination of peaks, valleys and spacing, and this is what allows the reader/sorter or other test device to "read" the character and be able to distinguish different characters.Mergers
Martin at Optimum Systems sells to both local banks and those using group purchasing. He says most mergers are within the state, so his location in central Ohio puts him at an advantage because group purchasing offices are nearby.Falstad and Leahey also have noticed no loss of business because of bank mergers. But a New Hampshire distributor recently lost several large accounts when local banks merged and centralized purchasing out of his territory.
The Carbon Band Controversy
Initially some people believed that stricter endorsement regulations in Regulation CC would disallow the use of the carbon stripe on most one-write checks. However, after discussion and lobbying, the Federal Reserve acknowledged that this type of check had to be permitted.However, the Fed cautioned users that if a check is returned for insufficient funds and if the carbon stripe obscured any part of the routing number, the bank on which the check had been drawn would be liable for the amount of the check. The Federal Reserve Board suggested that banks, which had to redesign their endorsement stamps anyway to include the new nine-digit routing number, should allow for the carbon stripe by locating the number either above or below it.
The carbon band controversy raised questions and caused confusion, says Staley. "We quoted verbatim from the Federal Reserve report so that our clients could understand. It did affect our business, however. Some of our clients went away from one-writes and have not come back."
John W. Hendricks, owner of JWH Associates in Montclair, N.J., sees more mergers in the financial community and more regulations. "We are in a pro-consumer environment. If the banking industry is to be your area of specialty, you must be fully committed or stay away from it," he says.
Diane Saunders is assistant managing editor of FORM magazine.
Expedited Funds Availability Act
The banking industry has moved to speed the transfer of funds from one bank to another to reduce the time that funds from deposited checks are held and to reduce check fraud. The new guidelines are a result of the Expedited Funds Availability Act, which took effect Sept. 1, 1988.
Banks traditionally placed a hold on funds deposited to a checking account when the funds were received by check to reduce the cost of checks returned for insufficient funds. The customer's access to money represented by that check is restricted from two to seven working days.
The slow situation persisted until the Federal Reserve Board intervened in 1986 asking Congress to streamline the process.
To assist banks in processing checks, the Federal Reserve developed a new set of check endorsement specifications ensuring that the information is complete, clearly visible and easy to locate. The endorsement must be located on the back of the check, at least three inches from the leading edge (the part of the check that enters the reader/sorter first, the right edge when viewed from the face, the left edge when viewed from the back) and 1 1/2 inches from the trailing edge. In addition to sufficient room for a written endorsement, any disclaimer or other printing required by the customer on the back of a check must be contained in the area located 1 1/2 inches from the trailing edge of the check.